100. But you did not tell the public in the
statutory return?
(Mr Headdon) It was not intended to be insurance against
a change of the legal position.

101. Why did you think it necessary to tell
the regulator that outside the statutory return but not declare
it in the statutory return?
(Mr Headdon) When these sorts of reinsurance arrangements
are put in place the regulator is always fully involved in the
full detail of the reinsurance arrangements.

102. With respect, the regulator is not a policyholder.
You, the Society, have a duty of full disclosure first to the
policyholder.
(Mr Headdon) We never purported that the reinsurance
was a protection against the legal position. It was designed to
cover part of the claims that would arise in certain economic
circumstances.

103. But if one of the policyholders had been
sent the statutory return, if you had given it to him on request,
and he had looked at whatever page it is Mr Cousins referred to
and wanted to check whether or not this provision would protect
him, he would not have been able to find that information, would
he?
(Mr Headdon) I am not quite sure what terms you mean
by "protection". As I said previously, the statutory
returns are all about the ability to meet guaranteed liabilities
and that is not in doubt. As we said, we are not and never have
been technically insolvent. The impact on policyholders of the
House of Lords decision is on a final bonus entitlement.

104. Let us look at that for a minute. You told
us earlier that the Society had decided to stimulate a court case
to clear the air on this position. Then you have also taken out
a reinsurance policy to protect the policyholders on economic
terms, but the Society chose not to reinsure itself against a
successful legal challenge, even though it was stimulating the
legal case.
(Mr Headdon) In the first instance, as I said previously,
the legal case was about the differential bonus between the two
forms. It was not primarily about the ring-fencing issue, which
only emerged at the House of Lords stage. Secondly, I think it
would be very difficult to obtain general insurance cover against
a possible adverse legal decision.

105. You therefore say that the policyholders
could not have expected you to declare that?
(Mr Headdon) No, I think not.

106. After the House of Lords ruling, was there
a change in terms in respect to the reinsurance policy?
(Mr Headdon) Yes, the reinsurance was renegotiated
because clearly we were adopting a different final bonus approach
than had been the case when it was originally set up.

107. Did you disclose that to the regulator?
(Mr Headdon) Yes.

108. Why has there been no claim made against
the reinsurance policy to date?
(Mr Headdon) Because the economic circumstances in
which it would apply have not arisen.

Chairman

109. Can you explain that?
(Mr Headdon) All reinsurance is against the more adverse
extremes of experience and the reinsurance would basically apply
if we were in economic conditions where there was very little
final bonus payable and there was a substantial amount of benefits
taken in guaranteed annuity form. Those circumstances have not
yet arisen.

Mr Davey

110. At any stage did you discuss this with
the regulator prior to the House of Lords ruling, as to what you
would do in the circumstances of a successful challenge?
(Mr Headdon) A successful challenge?

111. A challenge against you?
(Mr Headdon) Throughout the legal proceedings we had
tried to assess the whole range of possible outcomes, however
likely or unlikely, and prepare plans as to how we would need
to react to those, and we shared those plans with the regulator.

Judy Mallaber

112. Following on from that, can you clarify
the fact that before all of this you did not have any insurance
policy relating to guaranteed annuities and the potential losses
and costs?
(Mr Headdon) That is correct.

113. You never at any time had any insurance
policy before that time on those issues?
(Mr Headdon) That is correct.

114. Mr Sclater, I do not have an interest in
Equitable Life to declare. The only reason why I do not is because
I did not get it together to take out the AVCs that many other
members of the parliamentary scheme do have. If I had done so,
would I have received any indication or any warning at any time
up until the point where you stopped taking on new business about
your financial position? Would I have had any information from
you at all on that?
(Mr Sclater) I do not know what information your own
office provides you with but the Equitable sought to make clear
to its policyholders as the situation unfolded what the facts
were as best it could.

115. As a potentially new policyholder, what
information would I have from you?
(Mr Sclater) It depends what time you were becoming
a new policyholder.

116. At any time up until you stopped taking
them: would I have known anything, for example, about the level
of your reserves?
(Mr Sclater) Yes, you would have been able to look
them up in our report and accounts.

117. As a new policyholder, I should not have
been given any information about the financial difficulties that
you were potentially going to have.
(Mr Sclater) From late 1998 onwards I think our financial
circumstances were debated very widely in the newspapers. We certainly
did not attempt to cover anything up. For example, after the House
of Lords judgment of July 2000, I think I am right in saying that
any new policyholder taking out a policy was particularly asked
to clarify the fact that he or she was aware of the circumstances
in which the Society then was.

118. Mr Beard has just read out to you a letter
pointing out that, even in February 2000, you were giving assurances
to existing policyholders, let alone new ones, that there would
be no significant costs if the Court of Appeal's decision were
upheld in House of Lords.
(Mr Sclater) As Mr Headdon said just now, the Court
of Appeal judgment supported the concept of ring-fencing, which
would have left the guaranteed annuity rate policyholders in different
position as to the sharing amongst those with guaranteed annuity
policies. It would not have cross-infected over the larger body
of policyholders who had no guaranteed annuity rate policies.
So that statement you refer to was to the very best of our knowledge
and belief correct at that time.

119. Moving on from the letter, between July
and November of last year, Equitable spent £2.9 million on
advertising. That strikes me as being pretty aggressive advertising,
even after the House of Lords judgment. Do you think that that
was a proper thing for you to do, given the uncertainty that would
have meant for new policyholders?
(Mr Sclater) The Society, after the House of Lords
judgment, as you remember, immediately put itself up for sale.
Everybody agreedthe regulators, our board, our advisers,
Schroders, our lawyers, et ceterathat by far the best outcome
would be to sell the Society as a going concern. To that end,
it was very important to remain in business and to retain what
was considered to be a uniquely valuable asset in the form of
the sales force of the Society. So the Society, with everybody's
support and blessing, continued in business. In fact the level
of the expenditure that you refer to on advertising in that period,
I think I am correct in saying, was rather less than, for example,
it had been the previous year. It was not an overly aggressive
campaign at all. It was an effort to try and maintain the Society
in business as a going concern in the hope that a good buyer would
be found at a good price, which we firmly believed would be possible.